what will negative interest rates do?

[Gone4Good]

I had to calculate the total cost of funding to the bank and pass it to all the lending depts so they knew what they had to get just to break even... it would have included all reserves set asides and even a negative rate, which when you come down to it is basically a reserve requirement....

I doubt any bank is allocating ECB interest the way you suggest.

The ECB is charging member banks who deposit money with the ECB interest on those deposits. If the banks lend that money out, instead of depositing it with the ECB, they don't pay that interest.

So interest paid to the ECB is not a cost of loaning money. It is a cost of not loaning money. Which makes it the opposite of a reserve requirement.

 

[Texas Proud]

I doubt any bank is allocating ECB interest the way you suggest.

The ECB is charging member banks who deposit money with the ECB interest on those deposits. If the banks lend that money out, instead of depositing it with the ECB, they don't pay that interest.

So interest paid to the ECB is not a cost of loaning money. It is a cost of not loaning money. Which makes it the opposite of a reserve requirement.

My bad choice of words.... back when I was doing the calc the amount set aside for reserves was pretty big... AFAIK, there are no required reserves set aside for deposit now... I had to adjust the deposit base by the level of reserves to calculate a composite rate for the bank...

All I was trying to point out is that if you are now paying to keep deposits there that is just another cost that you have to factor in to your composite rate calculation...

Also, unless your bank has a lot of brokered deposits it is not as easy as you would think to shed deposits... not without pissing off a good part of your customer base and that is something a bank does not want to do.... they are thinking this is a short term issue and the cost of acquiring a customer can be high... you do not want to run them off...

 

[gerntz]

I think pick, shovel, strong box, and gun sales will increase.

 

[Al in Ohio]

If you watch CD rates, you would know that .25% raising did not change anything in CD market. It states a lot for now.

It did where I am. One bank advertised for 2.0% over 60 months (double what it had been for quite some time), then other banks followed suit. Granted it wasn't an immediate reaction, it took about 4-6 weeks for banks where I am to react.

And the Fed has announced they will incrementally raise the rate again in the next few weeks when they convene again.

I listen to the financial market news on NPR on my drive home from w*rk. Not sure if I will be on top of this as much daily when my drive home ceases after FIRE!


Sent from my iPad using Early Retirement Forum

 

[gcgang]

James Grant Interview Part II (Page 1)

James Grant: negative interest rates are not only a tax on saving, it is the destruction of saving.

 

[ziggy29]

James Grant: negative interest rates are not only a tax on saving, it is the destruction of saving.

Pretty much. If a near-zero interest rate policy since 2009 has been "the War on Savers", negative interest rates would be dropping the atomic bomb on them.

 

[Gone4Good]

James Grant Interview Part II (Page 1)

James Grant: negative interest rates are not only a tax on saving, it is the destruction of saving.

As is inflation.

And right now the world has too much money lying around idle. A tax on cash savings in the absence of inflation is exactly what is called for.

 

[MichaelB]

And right now the world has too much money lying around idle. A tax on cash savings in the absence of inflation is exactly what is called for.

Negative interest rates indicate there is a surplus of savings. What the world needs is higher aggregate demand. A tax on savings will not lead to that. What is really needed is not easily achieved using monetary policy.

 

[Gone4Good]

Negative interest rates indicate there is a surplus of savings. What the world needs is higher aggregate demand. A tax on savings will not lead to that. What is really needed is not easily achieved using monetary policy.

Monetary policy is the preferred policy approach to keeping AD and AS matched at low rates of inflation. That's what happens in every recession (the Fed cuts rates) and in every expansion (the Fed raises rates).

The big difference now is that rates have hit a 0% floor which keeps them higher than they otherwise would be. So negative rates are indeed called for.

But here's the question: Europe is currently battling both high unemployment and negative inflation. If the ECB's deposit rate were currently 2%, would anyone question whether the central bank should cut rates?

The zero lower bound creates practical problems for continued monetary easing. Not conceptual ones.

 

[MichaelB]

Monetary policy is the preferred policy approach to keeping AD and AS matched at low rates of inflation. That's what happens in every recession (the Fed cuts rates) and in every expansion (the Fed raises rates).

The big difference now is that rates have hit a 0% floor which keeps them higher than they otherwise would be. So negative rates are indeed called for.

But here's the question: Europe is currently battling both high unemployment and negative inflation. If the ECB's deposit rate were currently 2%, would anyone question whether the central bank should cut rates?

The zero lower bound creates practical problems for continued monetary easing. Not conceptual ones.

Monetary policy is not the preferred option to stimulate demand, which is why negative interest rates are not generating the desired economic growth. Other policies are more direct and can have greater impact, but they are not the responsibility of the Central Bank. In other words, the Central Bank is doing what it can, not what should be done.

This is not really the thread topic, so to try an get back on topic, my response to the OP question: To consumers, negative interest rates will lower the cost of borrowing even more. To savers, it will lower the future return on fixed income. For institutions, it will make it more difficult and costly to hold large amounts of liquidity over time. Finally, and most importantly, for the economy it will most assuredly lead to a mis-allocation of capital, if it hasn't already done so.

 

[gcgang]

Bill Gross: Central Banks Are ‘Running Out of Time’ - Barron's

Bill Gross is also quite skeptical of the outcome of the negative rate experiment.

 

[John Galt III]

Negative interest rates make me think of a farmer's well that's gradually dropping in water level during the dry season, as the water table drops. Finally the water table is at the bottom of the well, and the bucket comes up empty. A few weeks later the water table is 2 feet below the bottom of the well, and the farmer pulls up the bucket to find it still empty.

The farmer says "Darn, this well is still dry". But his cityslicker friend corrects him with "No, no, Earl, it's negative 2 feet full".

 

[Gone4Good]

Bill Gross: Central Banks Are ‘Running Out of Time’ - Barron's

Bill Gross is also quite skeptical of the outcome of the negative rate experiment.

Can you post an excerpt for those of us who don't subscribe to Barron's?

Until then, I'll just note that Mr. Gross hasn't been the best at forecasting the impact of monetary policy during these "through the looking glass" times.

The first inklings of trouble at Pimco began when Gross made a wrong-way bet in February 2011 based on the Federal Reserve’s program of quantitative easing. QE was expected by many to cause faster inflation, sending rates higher and adding to the federal budget deficit. In anticipation, Gross eliminated holdings of U.S. Treasuries.

While his view wasn't that exceptional, his decision was. Getting out of U.S. Treasuries was big, bold and, as it turned out, bad. At the time, 10-year Treasuries were yielding 3.48 percent. They soon fell to less than 3 percent, as bonds continued their epic 30-plus-year rally. Today, they yield less than 2 percent.

 

[Gone4Good]

So in Switzerland we have an answer to the question "What will central bank negative interest rates do?"

They'll drive other rates negative too:

Reid points to Switzerland, where AA [rated] Swiss corporate yields are negative out to 10 years, which shouldn’t be a surprise given that 2-, 5- and 10-year Swiss government yields were at -1.085%, -0.78% and -0.31%, respectively.

 

[Totoro]

Isn't that picture dominated by very few companies like Nestle and Novartis?

Those are AAA companies, of which many have negative yields worldwide.

[Edit] Correction: Not quite, but close in rest of Europe http://www.bloomberg.com/news/artic...bonds-teeter-on-negative-yields-on-qe-outlook

 

[Gone4Good]

Isn't that picture dominated by very few companies like Nestle and Novartis?

Switzerland is a small country, so yeah, there's not going to be many issuers.

Nevertheless, previous comments in this thread argued that negative central bank rates would raise other interest rates. And the evidence seems to be that government securities, LIBOR, corporates, all went negative along with the central banks.

Perhaps banks tried to lift lending rates in the private market, but that's got to be hard to sustain when the capital markets are all going in the other direction.